Functional Budget - Solution

MANAGEMENT ADVISORY SERVICES
12 Financial And Operating Budgeting
jjaurojrtcbic
May 2013
MULTIPLE CHOICE QUESTIONS

1.
A common starting point in the

budgeting process is
a. expected future net income.
b. past performance.
c. to motivate the sales force.
d. a clean slate, with no expectations.
7.
Long-range
planning
usually
encompasses a period of at least
a. six months.
b. 1 year.
c. 5 years.
d. 10 years.
2.
A budget period should be

a. monthly.
b. for a year or more.
c. long-term.
d. long
enough
to
provide
an
obtainable
goal
under
normal
business conditions.
8.
3.
If a company has adopted continuous

budgeting, the budget will show plans
for
a. every day.
b. a full year ahead.
c. the current year and the next year.
d. at least five years.
Which is the last step in developing the

master budget?
a. Preparing the budgeted balance
sheet
b. Preparing
the
cost
of
goods
manufactured budget
c. Preparing the budgeted income
statement
d. Preparing the cash budget
9.
A master budget consists of

a. an interrelated long-term plan and
operating budgets.
b. financial budgets and a long-term
plan.
c. interrelated financial budgets and
operating budgets.
d. all the accounting journals and
ledgers used by a company.
4.
5.
6.
Budget development for the coming

year usually starts
a. a year in advance.
b. the first month of the year to be
budgeted.
c. several months before the end of
the current year.
d. the last month of the previous year.
The budget committee
normally include the
a. research director.
b. treasurer.
c. sales manager.
d. external auditor.
would
10
The starting point in preparing a master

budget is the preparation of the
a. production budget.
b. sales budget.
c. purchasing budget.
d. personnel budget.
11 .
What
is
the
proper
preparation
sequencing of the following budgets?
not
1.
The budget committee in a company is

often headed by the
a. president.
b. controller.
c. treasurer.
d. budget director.
a.
b.
c.
d.
1,
2,
2,
2,
2,
3,
3,
4,
3,
1,
4,
1,
4
4
1
3
Budgeted
Balance
Sheet
2. Sales Budget
3. Selling
and
Administrative Budget
4. Budgeted
Income
Statement
PROBLEMS
1
Delta Manufacturing has budgeted the following unit sales:
2012
April
May
June
July
Units
25,000
40,000
60,000
45,000
Of the units budgeted, 40% are sold by the Coastal Division at an average price of $15 per unit and the
remainder are sold by the Central Division at an average price of $12 per unit.
Instructions
Prepare separate sales budgets for each division and for the company in total for the second quarter of
2013.
Solution 1
DELTA MANUFACTURING
Sales Budget
For the Quarter Ended June 30, 2013
Coastal Division
Expected unit sales
Unit selling price
Total sales
April
10,000
$15
$150,000
May
16,000
$15
$240,000
June
24,000
$15
$360,000
Total
50,000
$15
$750,000
Central Division
Expected unit sales
Unit selling price
Total sales
15,000
$12
$180,000
24,000
$12
$288,000
36,000
$12
$432,000
75,000
$12
$900,000
Total Company
Expected unit sales
Total sales
25,000
$330,000
40,000
$528,000
60,000
$792,000
125,000
$1,650,000
2
Butler Manufacturing manufactures two products, (1) Regular and (2) Deluxe. The budgeted units to be
produced are as follows:
Units of Product
2013
July
August
September
October
Regular
10,000
6,000
9,000
8,000
Deluxe
15,000
10,000
14,000
12,000
Total
25,000
16,000
23,000
20,000
It takes 2 pounds of direct materials to produce the Regular product and 5 pounds of direct materials to
produce the Deluxe product. It is the company's policy to maintain an inventory of direct materials on hand
at the end of each month equal to 30% of the next month's production needs for the Regular product
and 20% of the next month's production needs for the Deluxe product. Direct materials inventory on
hand at June 30 were 6,000 pounds for the Regular product and 15,000 pounds for the Deluxe product.
The cost per pound of materials is $5 Regular and $8 Deluxe.
Instructions
Prepare separate direct materials budgets for each product for the third quarter of 2013.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Industry/Sector
Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 2
BUTLER MANUFACTURING
Direct Materials BudgetRegular
For the Quarter Ended September 30, 2013
Units to be produced
Direct materials per unit
Total pounds needed for production
Add: Desired ending direct materials (pounds)
Total materials required
Less: Beginning direct materials (pounds)
Direct materials purchases
Cost per pound
Total cost of direct materials purchases
*30% (8,000 2)
July
10,000
2
20,000
3,600
23,600
6,000
17,600
$5
$88,000
August
6,000
2
12,000
5,400
17,400
3,600
13,800
$5
$69,000
September
Total
9,000
2
18,000
4,800*
22,800
5,400
17,400
$5
$87,000
$244,000
BUTLER MANUFACTURING
Direct Materials BudgetDeluxe
For the Quarter Ended September 30, 2013
Add: Desired ending direct materials (pounds)
July
15,000
5
75,000
10,000
August
10,000
5
50,000
14,000
September
14,000
5
70,000
12,000*
Total

Cost per pound
*20% (12,000 5)
85,000
15,000
70,000
$8
$560,000
64,000
10,000
54,000
$8
$432,000
82,000
14,000
68,000
$8
$544,000
$1,536,000
3
Garver Industries has budgeted the following unit sales:
2013
January
February
March
April
May
Units
10,000
8,000
9,000
11,000
15,000
The finished goods units on hand on December 31, 2012, was 2,000 units. Each unit requires 3 pounds
of raw materials that are estimated to cost an average of $4 per pound. It is the company's policy to
maintain a finished goods inventory at the end of each month equal to 20% of next month's anticipated
sales. They also have a policy of maintaining a raw materials inventory at the end of each month equal
to 30% of the pounds needed for the following month's production. There were 8,640 pounds of raw
materials on hand at December 31, 2012.
Instructions
For the first quarter of 2013, prepare (1) a production budget and (2) a direct materials budget.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Industry/Sector
Solution 3
(1)
GARVER INDUSTRIES
Production Budget
For the Quarter Ended March 31, 2013
Expected unit sales

Desired ending finished goods units
Total required units
Less: Beginning finished goods units
Required production units
January
10,000
1,600
11,600
2,000
9,600
February
8,000
1,800
9,800
1,600
8,200
March
9,000
2,200*
11,200
1,800
9,400
Total
27,200
*April units: 11,000 20%.
(2)
GARVER INDUSTRIES
Direct Materials Budget
Desired ending direct materials (pounds)
Cost per pound
January
9,600
3
28,800
7,380
36,180
8,640
27,540
$4
$110,160
February
8,200
3
24,600
8,460
33,060
7,380
25,680
$4
$102,720
**April units: 11,800 3 = 35,400 30%.

4
Benet Company has budgeted the following unit sales:
2013
2013
March
9,400
3
28,200
10,620**
38,820
8,460
30,360
$4
$121,440
Total
$334,320
Quarter
1
2
3
4
Units
105,000
60,000
75,000
120,000
Quarter
1
Units
90,000
The finished goods inventory on hand on December 31, 2012 was 21,000 units. It is the company's
policy to maintain a finished goods inventory at the end of each quarter equal to 20% of the next
quarter's anticipated sales.
Instructions
Prepare a production budget for 2013.
Solution 4
BENET COMPANY
Production Budget
For the Year Ended December 31, 2013
Quarter
Expected unit sales
Desired ending finished goods units
Total required units
Less: Beginning finished goods units
Required production units
1
105,000
12,000
117,000
21,000
96,000
*2013 Q1: 90,000 units 20% = 18,000.
2
60,000
15,000
75,000
12,000
63,000
3
75,000
24,000
99,000
15,000
84,000
4
120,000
18,000*
138,000
24,000
114,000
Total
357,000
5
The following facts are known:
The total pounds needed for production are 2 times the units to be produced.
The desired ending direct materials inventory is 20% of the total pounds needed for production.
The beginning direct materials inventory is equal in number to 10% of the units to be produced.
Cost per pound is $5.
Total cost of the direct materials purchases is $1,035,000.
Instructions
Prepare a direct materials budget for the period.
Solution 5
Let X = total units to be produced.
Then total pounds needed equals 2X.
Desired ending inventory is .20 2X.
The beginning inventory is .10X.
The direct materials budget is:
Add: Desired ending direct materials .2(2X)
Less: Beginning direct materials
2`1207,000
Cost per pound
*2X + .2(2X) .1X
2X + .4X .1X
2.3X
X
X
2
2X
.4X
2.4X
.10X
2.3X
$5
90,000*
2
180,000
36,000
216,000
9,000
5
$1,035,000
= 207,000
= 207,000
= 207,000
= 90,000
6
Pulham Company is preparing its direct labor budget for 2013 from the following production budget
based on a calendar year:
Quarter
1
2
3
4
Units
60,000
30,000
45,000
75,000
Each unit requires 2 hours of direct labor. The union contract provides for a 10% increase in wage rate
to $11 per hour on October 1.
Instructions
Prepare a direct labor budget for 2013.
Solution 6
PULHAM COMPANY
Direct Labor Budget
For the Year Ended December 31, 2013
Direct labor time (hours) per unit
Total required direct labor hours
Direct labor cost per hour
Total direct labor cost
*$11 110% = $10.
1
60,000
2
120,000
$10*
$1,200,000
Quarter
2
3
30,000
45,000
2
60,000
90,000
$10
$10
$600,000
$900,000
4
75,000
2
150,000
$11
$1,650,000
Total
$4,350,000
7
Shep Company combines its operating expenses for budget purposes in a selling and administrative
expense budget. For the first quarter of 2013, the following data are developed:
1.
2.
3.
Sales: 20,000 units; unit selling price:

Variable costs per dollar of sales:
Sales commissions
Delivery expense
Advertising
Fixed costs per quarter:
Sales salaries
Office salaries
Depreciation
Insurance
Utilities
$30
6%
2%
4%
$24,000
19,000
6,000
2,000
1,000
Instructions
Prepare a selling and administrative expense budget for the first quarter of 2013.
Solution 7
SHEP COMPANY
Selling and Administrative Expense Budget
Variable expenses
Sales commissions ($600,000 6%)
Delivery expense ($600,000 2%)
Advertising ($600,000 4%)
Total variable
Fixed expenses
Sales salaries
Office salaries
Depreciation
Insurance
Utilities
Total fixed
Total selling and administrative expenses
$ 36,000
12,000
24,000
72,000
$ 24,000
19,000
6,000
2,000
1,000
52,000
$124,000
8
The Northeast Regional Division of Union Corp. has been requested to prepare a quarterly budgeted
income statement for 2013. The regional manager expects that sales in the first quarter of 2013 will
increase by 10% over the same quarter of the preceding year and will then increase by 5% for each
succeeding quarter in 2013.
The corporate head office has requested that the regional manager maintain an inventory in dollars
equal to 25% of the next quarter's sales. Quarterly purchases average 55% of quarterly sales.
Budgeted ending inventory on December 31, 2012 is $176,000. Quarterly salaries are $20,000 plus 5%
of sales. All salaries are classified as sales salaries. Other quarterly expenses are estimated to be as
follows:
Rent expense
Depreciation on office equipment
Utilities expense
Miscellaneous expenses
$24,000
$12,000
$3,600
2% of sales
The income statement for the first quarter of 2012 was as follows:
Income Statement
Sales................................................................................................
Cost of goods sold..............................................................................
Gross profit.......................................................................................
Operating expenses
Sales salaries..............................................................................
Rent expense..............................................................................
Depreciation...............................................................................
Utilities......................................................................................
Miscellaneous..............................................................................
Total operating expenses.......................................................
Net income........................................................................................
$720,000
396,000
324,000
$52,000
24,000
12,000
3,600
12,800
104,400
$219,600
Instructions
Prepare a budgeted quarterly income statement in tabular form for the first quarter of 2013. (Show
computations.)
Solution 8
UNION CORP.
Northeast Regional Division
Budgeted Income Statement
Sales (1) .......................................................................................................
Cost of goods sold (2)......................................................................................
Gross profit.....................................................................................................
Operating expenses
Sales salaries (3)......................................................................................
Rent expense...........................................................................................
Depreciation.............................................................................................
Utilities....................................................................................................
Miscellaneous (4)......................................................................................
Total operating expenses.....................................................................
Net income.....................................................................................................
(1)
(2)
(3)
(4)
Sales Qtr. 1 $720,000 110% = $792,000

Cost of goods sold
Beginning inventory
Purchases ($792,000 55% = $435,600)
Cost of goods available
Ending inventory ($792,000 105% = $831,600 25% = $207,900)
Cost of goods sold
Sales salaries: $20,000 + ($792,000 .05) = $59,600.
Miscellaneous expenses: $792,000 .02 = $15,840.
$792,000
403,700
388,300
59,600
24,000
12,000
3,600
15,840
115,040
$273,260
$176,000
435,600
611,600
207,900
$403,700
9
Burr, Inc. provided the following information:
Projected sales
Projected merchandise purchases
July
$220,000
$150,000
August
$260,000
$180,000
Burr estimates that it will collect 40% of its sales in the month of sale, 35% in the month after the
sale, and 22% in the second month following the sale. Three percent of all sales are estimated to be
bad debts.
Burr pays 30% of merchandise purchases in the month purchased and 70% in the following month.
General operating expenses are budgeted to be $20,000 per month of which depreciation is $2,000
of this amount. Burr pays operating expenses in the month incurred.
Burr makes loan payments of $3,000 per month of which $400 is interest and the remainder is
principal.
Instructions
Calculate Burr's budgeted cash disbursements for August.
Solution 9
Cash paid for merchandise purchases:
August purchases: $180,000 30%
July purchases: $150,000 70%
Cash paid for operating expenses ($20,000 $2,000)
Cash paid for loan ($3,000 $400)
Cash paid for interest
Budgeted cash disbursements for August
$ 54,000
105,000
18,000
2,600
400
$180,000
10
Casa Development, Inc. has budgeted sales revenues as follows:
January
February
March
April
May
June
Budgeted Sales Revenues

$55,000
75,000
90,000
80,000
60,000
35,000
Past experience has indicated that 80% of sales each month are on credit and that collection of credit
sales occurs as follows: 60% in the month of sale, 30% in the month following the sale, and 5% in the
second month following the sale. The other 5% is uncollectible.
Instructions
Prepare a schedule which shows expected cash receipts from sales for the months of April, May, and
June.
10
CASA DEVELOPMENT, INC.
Expected Cash Receipts from Sales
For the Quarter Ended June 30
April
February sales
Credit sales: ($75,000 .80 .05)
May
June
$ 3,000
March sales
Credit sales:
($90,000 .80 .30)
($90,000 .80 .05)
21,600
$ 3,600
April sales
Credit sales:
($80,000 .80 .60)
($80,000 .80 .30)
($80,000 .80 .05)
Cash sales: ($80,000 .20)
38,400
19,200
$ 3,200
16,000
May sales
Credit sales:
($60,000 .80 .60)
($60,000 .80 .30)
Cash sales: ($60,000 .20)
28,800
12,000
June sales
Credit sales: ($35,000 .80 .60)
Cash sales: ($35,000 .20)
Total cash receipts
$79,000
$63,600
14,400
16,800
7,000
$41,400
11
Cruises, Inc. has budgeted sales revenues as follows:
June
$135,000
90,000
$225,000
Credit sales
Cash sales
Total sales
July
$125,000
255,000
$380,000
August
$ 90,000
195,000
$285,000
Past experience indicates that 60% of the credit sales will be collected in the month of sale and the
remaining 40% will be collected in the following month. Purchases of inventory are all on credit and
50% is paid in the month of purchase and 50% in the month following purchase. Budgeted inventory
purchases are:
June
July
August
$300,000
240,000
105,000
Other cash disbursements budgeted: (a) selling and administrative expenses of $48,000 each month,
(b) dividends of $103,000 will be paid in July, and (c) purchase of equipment in August for $30,000
cash.
The company wishes to maintain a minimum cash balance of $50,000 at the end of each month. The
company borrows money from the bank at 6% interest if necessary to maintain the minimum cash
balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning
cash balance on July 1 was $50,000. Assume that borrowed money in this case is for one month.
Instructions
Prepare a cash budget for the months of July and August. Prepare separate schedules for expected
collections from customers and expected payments for purchases of inventory.
Solution 11
CRUISES, INC.
Cash Budget
For the Two Months of July and August
Beginning cash balance
Add: Receipts
Collections from customers
Cash sales
Total receipts
Total available cash
Less: Disbursements
Purchases
Selling and administrative expenses
Dividends
Equipment purchase
Total disbursements
Excess (deficiency) of available cash over disbursements
Financing
Borrowings
Repayments
Ending cash balance
July
$ 50,000
August
$ 50,000
129,000
255,000
384,000
434,000
104,000
195,000
299,000
349,000
270,000
48,000
103,000
172,500
48,000
30,000
250,500
98,500
421,000
13,000
37,000
$ 50,000
(37,185)*
60,315
*37,000 6% 1/12 = $185 + $37,000 = $37,185.

Schedule of Expected Collections from Customers
Credit sales
June (135,000)
July ($125,000)
August ($90,000)
Total collections
July
$ 54,000
75,000
$129,000
August
$ 50,000
54,000
$104,000
Schedule of Expected Payments for Purchases of Inventory

Inventory purchases
June ($300,000)
July ($240,000)
August ($105,000)
Total payments
July
$150,000
120,000
$270,000
August
$120,000
52,500
$172,500
12
The Sunstate Bank has asked Dell Printing Co. for a budgeted balance sheet for the year ended
December 31, 2013. The following information is available:
1.
The cash budget shows an expected cash balance of $75,000 at December 31, 2013.
2.
The 2013 sales budget shows total annual sales of $800,000. All sales are made on account and
accounts receivable at December 31, 2013 are expected to be 10% of annual sales.
3.
The merchandise purchases budget shows budgeted cost of goods sold for 2013 of $600,000 and
ending merchandise inventory of $95,000. 20% of the ending inventory is expected to have not yet
been paid at December 31, 2013.
4.
The December 31, 2012 balance sheet includes the following balances: Equipment $294,000,
Accumulated Depreciation $122,000, Common Stock $270,000, and Retained Earnings $48,000.
5.
The budgeted income statement for 2013 includes the following: depreciation on equipment
$15,000, federal income taxes $21,000, and net income $49,000. The income taxes will not be paid
until 2013.
6.
In 2013, management does not expect to purchase additional equipment or to declare any
dividends. It does expect to pay all operating expenses, other than depreciation, in cash.
Instructions
Prepare an unclassified budgeted balance sheet at December 31, 2013.
Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector
Solution 12
DELL PRINTING CO.
Budgeted Balance Sheet
December 31, 2013
Assets
Cash................................................................................................
Accounts receivable............................................................................
Merchandise inventory........................................................................
Equipment........................................................................................
Less: Accumulated depreciation ($122,000 + $15,000)...........................
Total assets................................................................................
Liabilities and Stockholders' Equity
Accounts payable...............................................................................
Income taxes payable.........................................................................
Common stock...................................................................................
Retained earnings..............................................................................
Total liabilities and stockholders' equity..........................................
$ 75,000
80,000
95,000
$294,000
137,000
157,000
$407,000
$ 19,000
21,000
270,000
97,000
$407,000

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MANAGEMENT ADVISORY SERVICES

12 Financial And Operating Budgeting

MULTIPLE CHOICE QUESTIONS

A common starting point in the

A budget period should be

If a company has adopted continuous

Which is the last step in developing the

A master budget consists of

Budget development for the coming

The starting point in preparing a master

The budget committee in a company is

Total materials required

Expected unit sales

*April units: 11,000 20%.

**April units: 11,800 3 = 35,400 30%.

*2013 Q1: 90,000 units 20% = 18,000.

Cost per pound is $5.

Total cost of the direct materials purchases is $1,035,000.

Sales: 20,000 units; unit selling price:

Sales Qtr. 1 $720,000 110% = $792,000

Budgeted Sales Revenues

*37,000 6% 1/12 = $185 + $37,000 = $37,185.

Schedule of Expected Payments for Purchases of Inventory

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